Borrow, Speculate and Hope By PAUL KRUGMAN he National Association of Securities Dealers," The Wall Street Journal reports, "is investigating whether some brokerage houses are inappropriately pushing individuals to borrow large sums on their houses to invest in the stock market." Can we persuade the association to investigate would-be privatizers of Social Security? For it is now apparent that the Bush administration's privatization proposal will amount to the same thing: borrow trillions, put the money in the stock market and hope. Privatization would begin by diverting payroll taxes, which pay for current Social Security benefits, into personal investment accounts. The government, already deep in deficit, would have to borrow to make up the shortfall. This would sharply increase the government's debt. Never mind, privatization advocates say: in the long run, they claim, people would make so much on personal accounts that the government could save money by cutting retirees' benefits. Financial markets won't believe this claim, as I'll explain in a minute, but let's temporarily grant the point. Even so, if personal investment accounts were invested in Treasury bonds, this whole process would accomplish precisely nothing. The interest workers would receive on their accounts would exactly match the interest the government would have to pay on its additional debt. To compensate for the initial borrowing, the government would have to cut future benefits so much that workers would gain nothing at all. How, then, can privatizers claim that they could secure the future of Social Security without raising taxes or reducing the incomes of future retirees? By assuming that workers would invest most of their accounts in stocks, that these investments would make a lot of money and that, in effect, the government, not the workers, would reap most of those gains, because as personal accounts grew, the government could cut benefits. We can argue at length about whether the high stock returns such schemes assume are realistic (they aren't), but let's cut to the chase: in essence, such schemes involve having the government borrow heavily and put the money in the stock market. That's because the government would, in effect, confiscate workers' gains in their personal accounts by cutting those workers' benefits. Once you realize that privatization really means government borrowing to speculate on stocks, it doesn't sound too responsible, does it? But the details make it considerably worse. First, financial markets would, correctly, treat the reality of huge deficits today as a much more important indicator of the government's fiscal health than the mere promise that government could save money by cutting benefits in the distant future. After all, a government bond is a legally binding promise to pay, while a benefits formula that supposedly cuts costs 40 years from now is nothing more than a suggestion to future Congresses. Social Security rules aren't immutable: in the past, Congress has changed things like the retirement age and the tax treatment of benefits. If a privatization plan passed in 2005 called for steep benefit cuts in 2045, what are the odds that those cuts would really happen? Second, a system of personal accounts, even though it would mainly be an indirect way for the government to speculate in the stock market, would pay huge brokerage fees. Of course, from Wall Street's point of view that's a benefit, not a cost. There is, by the way, a precedent for Bush-style privatization. One major reason for Argentina's rapid debt buildup in the 1990's was a pension reform involving a switch to individual accounts - a switch that President Carlos Menem, like President Bush, decided to finance with borrowing rather than taxes. So Mr. Bush intends to emulate a plan that helped set the stage for Argentina's economic crisis. If Mr. Bush were to say in plain English that his plan to solve our fiscal problems is to borrow trillions, put the money into stocks and hope for the best, everyone would denounce that plan as the height of irresponsibility. The fact that this plan has an elaborate disguise, one that would add considerably to its costs, makes it worse. And maybe the fact that serious financial experts, the sort qualified to be Treasury secretary, understand all this is the reason why John Snow has just been reappointed. http://www.nytimes.com/2004/12/10/opinion/10krugman.html?pagewanted=print&position=
Early in his first term Bush had the ex Pinochet Social Security Head go out to the ranch to tutuor him on plots to privatize social security. Thatcher a neocon hero did the privitization thing and many of the ordinary folks lost the money in their accounts by being too speculative due to bad broker advice. It is pretty well documented how the Mutual Funds and large stock borkers have bankrolled such projects as the Cato Institute's cocial security privitiization plan. They hope to make a lot of money managing the additional private accounts. There main thrust is to try to convince young folks that the system won't work for them. Important aspects of the social security crisis are about as relaible as the propaganda put out about wmd in Iraq. BTW, Gore had it right. "Social security plus" he called it. If you want to use some government money to let ordinary people have private accounts, fine. Borow the emoney for that. Just leave people's safe maoney in social security alone. It was a priority of Bush's first term to get rid of the surplus as it could have been used to fund such accounts or even to extend the social security shortfall that could occur to 70 years or more.
December 13, 2004 SOCIAL SECURITY DOOM MONGERING....As we all know — because President Bush told us yesterday — Social Security "is headed towards bankruptcy down the road." Specifically, according the Social Security trustees, the point at which full benefits can no longer be paid out comes 38 years from now in the year 2042. This prediction is based on a complex model that takes into account future economic performance, population growth, demographic changes, and so forth. But anyone who's been listening to the Social Security doom mongers for a while knows that there's a problem with this prediction — and since a picture is worth a thousand words I commissioned the chart on the right from the crack Political Animal graphics team. It shows the last decade's worth of Social Security predictions, and it turns out that back in 1994 the Social Security trustees were predicting that doomsday was.... 35 years away. That's right: even though ten years have passed, doomsday is now farther away than it was in 1994. As every year goes by, the doomsday schedule moves out another year too. Why? Because the doomsday predictions are extremely sensitive to the economic assumptions behind them,and if those assumptions are off by a little bit, so are the predictions. In other words, Social Security doom mongering has a pretty checkered past — which means that perhaps the current doom mongering isn't quite on target either. In fact, maybe Social Security is in perfectly good shape and doesn't need "rescuing." The most prudent course might be to wait a few years and find out. link
Funny how over half of American households "speculate" in the stock market. Krugman is a charlatan, hell bent on maintaining the horrific status quo that constitutes our current Social Security System. At least he was able to make the argument without envoking "ENRON" or "WORLDCOM" demagoguery. Kerry never seemed to be able to keep those companies out of it. Stocks are evil. Americans can't invest for themselves. Choice is bad. The government is the answer to all our problems. Yeah, keep thinking that, Paul. You'll just keep losing elections for your party.
If the government is not the answer to our retirement problems, why should should we look to change a government retirement program (versus killing it now). As usual, you are not making any sense. BTW, Americans can't invest for themselves. Got any .com stock you are still looking to sell?
Social Security Suicide By Molly Ivins, AlterNet. Posted December 14, 2004. The Bushies don't want to mend Social Security, they want to end it – and they are quite upfront about it. Relatively recent writings on Social Security, both to reform and not reform, convince me of two things. One is that we should be looking for maximum skepticism in our sources on this subject. And the second is that anybody who starts with dismissive, condescending and absolutist views isn't worth reading or listening to on this subject. So that leaves out politicians. There's a lot of fake objectivity out there, too. I personally think the Bush proposal for privatizing Social Security is loony, radical and unnecessary, but that's not an argument, it's a conclusion. It's the people who aren't willing to make the case that you have to watch out for. Also, beware hidden assumptions – as in, "Everybody knows Social Security is (a) in trouble, (b) bankrupt or (c) will expire next week." In fact, "everybody knows" very little on this subject because the arguments about the system's future are built on complex, long-term economic models that can easily be thrown off by a single year. And if there's one thing the economy does with some regularity, it is confound expert predictions. Demographic changes, population growth and many other variables also influence how the models are drawn. A second problem is that reporters of all kinds and stripes are notoriously weak on math. The Nation's Calvin Trillin says his trouble stems from his failure to convince his math teachers that many of his answers were meant in an ironic sense. I sometimes have to call John Pope of the New Orleans Times-Picayune just to make sure that going from 40 percent to 60 percent is still an improvement of 20 percentage points, and also a 50 percent improvement. This debate is landmined with Phony Fun Facts. One notorious scare tactic is to note that when Social Security began, there were 42 workers for each retiree. Now, there are three workers per retiree. And in 25 years, there will be only two. Ergo, we're doomed. Actually, at the "frightening" current rate of three workers per retiree, the system is producing a surplus and being skimmed to finance the rest of the federal budget. Alas, Al Gore's famous "lockbox" got lost along with a lot of hanging chads in Florida. Q: Can we at least agree that we have a problem? A: No. The argument in favor of "no" has two parts. One involves the incredible shrinking doom date. As Kevin Drum of Washington Monthly points out, the Social Security trustees, always operating on a properly gloomy forecast, have been predicting disaster for the system for years, but the projected point at which it will go bust keeps moving. In 1994, the system was supposed to go bust in 2029, a mere 35 years from the date of prediction. Now, it's supposed to go bust in 2042, 38 years down the road. According to the Congressional Budget Office, using a more realistic model, the trust fund will run out in 2052, and even then it will cover 81 percent of the promised benefits. To fully fund this shortfall would require additional revenue of 0.54 percent of GDP, less than we are currently spending in Iraq. Or, as Paul Krugman noted in The New York Times, about one quarter of the revenue lost each year by President Bush's tax cuts, "roughly equal to the fraction of those cuts that goes to people with incomes of $500,000 a year." The second argument involves the motives of those who are arguing for privatization. If there is a problem with Social Security, the obvious solution would be to raise taxes, cut benefits or some combination of both. Of course, I'm in favor of cutting benefits to the wealthy – Ross Perot doesn't need the payout, and he's such a patriot, he's probably giving it back already. Or, we could have a peppy discussion of how to raise what kind of taxes, if necessary – especially since the tax as it is structured is a terrible burden on the poor and middle class. It actually cuts OFF at $87,900 a year. But that's not the Bush scheme here. The Bushies don't want to mend it, they want to end it – and they are quite upfront about it. This is not some leftist conspiracy theory: Grover Norquist of The Club for Growth has been open about it for years. What we have here is a happy convergence of ideology (the Market Can Solve All Problems) and greed. The greed is from the financial industry, which stands to pick up an incalculable sum in profits – and, of course, the financial industry contributes generously to Guess Who. Just the Bush plan of partial privatization would cost about $1.5 trillion in transition costs over 10 years, and Bush wants to borrow that money. Next week, the White House will launch a giant public relations campaign, just as it did with the campaign to sell us on the Iraq war, with a lot of phony information to convince us all this lunacy is good for us. Social Security is of particular concern to women, since we live longer and have fewer earnings to rely on in retirement. It's kind of hard not to be stunned by the irresponsibility of this scheme. To just blithely borrow the money to destroy a successful social program is, well, loony, bizarre and irresponsible.
